Uncertainty and Black Swans - #12

Uncertainty and Black Swans

No. 12 — read time 4 minutes
Welcome to The Soloist, a weekly newsletter where I provide actionable ideas to help you become a healthy, wealthy, sovereign entrepreneur.

One of my favorite authors, Nassim Nicholas Taleb, wrote a book called The Black Swan.

The gist of the book is that we as humans cannot predict extremely volatile events and that our reliance on past events and data keep us blind to the unpredictability of these types of events.

Remember the story of the Turkey from last week?

Based on past events, a Turkey assumes each day will involve roaming around and eating grain.

Past data cannot prepare the Turkey for Thanksgiving.

In an ironic twist, the book was published in April 2007.

Lehman Brothers collapsed in September 2008.

If you've been tracking, yesterday Silicon Valley Bank, the 16th largest bank in the U.S. and the largest by market share for tech companies and startups, completely failed.

The FDIC stepped in and all customer deposits are frozen until the mess is sorted.

I don't want to spend time here on the specific of what happened except to draw some lessons for you and I on how to behave in the face of uncertainty to protect our families.

If you'd like to read up on the details, these are my favorite threads covering the story:

The Venture Capital funds will be fine. Hopefully many of the companies themselves will be fine.

In the meantime, employees get hosed.

Payroll has already been impacted and if this is not resolved by Monday, other banks serving startups like First Republic, Western Alliance, and Signature Bank could be at risk of failure as well.

One thing I've learned over time is to never assume that just because things have been a certain way, they will continue to be that way.

A brief story to demonstrate:

In 2007, I built a real estate investment and mortgage company out of my dorm room in college.

It did so well I dropped out of college to scale it up.

My partner and I bought two properties before we turned 20, rented out an office, hired 10 cold callers, and were ready to each buy $650k new construction condos to congratulate ourselves on our genius.

We were living large before we could legally drink.

Then the global financial crisis hit.

One bank we did a lot of business with stopped answering their phone. A colleague who worked there told me boxes full of mortgage applications were being used to hold open doors as regulators came through to sort out the mess. The bank was New Century Mortgage.

My business tanked and I lost both properties. Ouch.

I was too concentrated in a single asset (real estate).

Painful lesson but not one I couldn't recover from. But it imprinted in my brain a fear of concentration.

And that's precisely what so many of the smartest people do with their careers—they are completely concentrated.

Take any person working in tech, and besides their 401k, most of their net worth and ability to produce income is tied up in their 9-5 job.

The moment layoffs hit. The moment the largest startup bank fails. The moment...

The person with the single source of failure is left naked.

Yes, extreme focus is important when trying to master a craft.

But when it comes to providing for your family, extreme concentration is riskier than self-employment. Yet so many 9-5ers do exactly that—concentrate all their income in single employer.

In a different book by Taleb, Antifragile, he tells the story of a taxicab driver and his brother the banker.

The cab driver in the parable has more robustness than the banker does since his income is dependent on many clients throughout the day.

If business slows down he can drive in a different part of town.

The banker is screwed if his employer goes belly up.

I hope the mess with Silicon Valley Bank gets resolved and everyone is made whole.

But I leave you with this reminder—let us always prepare for the uncertain and build robustness in our lives.

No one else will do it for us.

Ciao,

Tom

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